[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
2012 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SOCIAL SECURITY
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JUNE 21, 2012
__________
Serial No. 112-SS17
__________
Printed for the use of the Committee on Ways and Means
----------
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COMMITTEE ON WAYS AND MEANS
DAVE CAMP, Michigan, Chairman
WALLY HERGER, California SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas CHARLES B. RANGEL, New York
KEVIN BRADY, Texas FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin JIM MCDERMOTT, Washington
DEVIN NUNES, California JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky XAVIER BECERRA, California
DAVID G. REICHERT, Washington LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana MIKE THOMPSON, California
PETER J. ROSKAM, Illinois JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania EARL BLUMENAUER, Oregon
TOM PRICE, Georgia RON KIND, Wisconsin
VERN BUCHANAN, Florida BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York
Jennifer Safavian, Staff Director and General Counsel
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON SOCIAL SECURITY
SAM JOHNSON, Texas, Chairman
KEVIN BRADY, Texas XAVIER BECERRA, California
PATRICK J. TIBERI, Ohio LLOYD DOGGETT, Texas
AARON SCHOCK, Illinois SHELLEY BERKLEY, Nevada
RICK BERG, North Dakota FORTNEY PETE STARK, California
ADRIAN SMITH, Nebraska
KENNY MARCHANT, Texas
C O N T E N T S
__________
Page
Advisory of June 21, 2012 announcing the hearing................. 2
WITNESSES
Charles P. Blahous III, Ph.D. Trustee, Social Security and
Medicare Boards of Trustees, Testimony......................... 6
Robert D. Reischauer, Ph.D. Trustee, Social Security and Medicare
Boards of Trustees, Testimony.................................. 15
SUBMISSIONS FOR THE RECORD
The Honorable Pete Stark......................................... 43
NCPA............................................................. 45
MATERIAL SUBMITTED FOR THE RECORD
Questions For The Record:
Charles P. Blahous III, Ph.D..................................... 50
2012 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES
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THURSDAY, JUNE 21, 2012
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:06 a.m. in
Room B-318, Longworth House Office Building, the Honorable Sam
Johnson [Chairman of the Subcommittee] presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY
Chairman Johnson Announces Hearing on the 2012 Annual Report of the
Social Security Board of Trustees
Thursday, June 21, 2012
U.S. Congressman Sam Johnson (R-TX), Chairman of the House
Committee on Ways and Means Subcommittee on Social Security announced
today that the Subcommittee will hold an oversight hearing on the
findings in the 2012 Annual Report of the Social Security Board of
Trustees. The hearing will take place on Thursday, June 21, 2012 in B-
318 Rayburn House Office Building, beginning at 9:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
The Board of Trustees of the Federal Old-Age and Survivors
Insurance (OASI) and the Federal Disability Insurance (DI) Trust Funds
was established under the Social Security Act to oversee the financial
operations of the OASDI Trust Funds. The Board is comprised of six
members, four of whom serve by virtue of their positions in the Federal
Government (the Secretary of the Treasury (who also serves as Managing
Trustee), the Secretary of Labor, the Secretary of Health and Human
Services, and the Commissioner of Social Security) and two members of
the public who are appointed by the President and confirmed by the
Senate. The Deputy Commissioner of Social Security Administration
serves as Secretary of the Board.
The Social Security Act requires that the Board, among other
duties, report annually to the Congress on the financial status of the
OASI and DI Trust Funds. The overview section of the 2012 report
concluded, ``Under the long-range intermediate assumptions, annual cost
for the OASDI program is projected to exceed non-interest income in
2012 and remain higher through the remainder of the long-range period.
The combined OASI and DI Trust Funds are expected to increase through
2020, and then to decline and become exhausted and unable to pay
scheduled benefits in full on a timely basis in 2033. However, the DI
Trust Fund becomes exhausted in 2016, so legislative action is needed
as soon as possible.''
In the absence of intervening Congressional action or changes in
projections, the Trustees project that incoming Social Security
revenues would be sufficient to pay about three-quarters of scheduled
benefits starting in 2033 and over the rest of the 75-year period.
In their ``Message from the Public Trustees,'' the Public Trustees
concluded that Social Security's finances had deteriorated primarily
because of a weak economy and higher-than-expected inflation. They
said, ``[t]he Social Security outlook has worsened significantly
relative to last year's report. The actuarial deficit in its combined
trust funds is now 2.67 percent of taxable payroll, the highest
recorded since the last major Social Security financing reforms roughly
three decades ago.'' They also said, ``While there is no way to know
what mixture of additional revenue and restraints on benefit growth
will prove to be the most palatable means of strengthening Social
Security's financial position, lawmakers should be aware that it will
become increasingly difficult to avoid adverse effects on current
beneficiaries, those close to retirement, and low-income beneficiaries
in all birth cohorts if legislative actions are delayed much further.''
In announcing the hearing, Chairman Sam Johnson (R-TX)
stated,``Americans have long known that without change, Social Security
will be unable to keep its promises to the hard-working taxpayers who
pay into the system. According to this year's report, not only is
Social Security's outlook worse, it is clear that the longer we wait
the harder it will be to protect benefits for those who rely on them
most. I hope this hearing will help lead us to find commonsense
solutions to secure Social Security's future.''
FOCUS OF THE HEARING:
The hearing will focus on the findings in the recently released
2012 Annual Report of the Board of Trustees of the OASDI Trust Funds,
the effect of the trust funds' current cash flow deficit status and
future exhaustion, and the cost of delaying actions to address Social
Security's fiscal challenges for workers and beneficiaries.
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Finally, please note that due to the change in House mail policy, the
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the World Wide Web at http://www.waysandmeans.house.gov/.
Chairman JOHNSON. This hearing will come to order. Good
morning to both of you. Thank you for being here.
According to this year's report from the Social Security
Board of Trustees, Social Security will be unable to keep its
promises to the hard working Americans who pay into the system.
We will hear today that not only is Social Security's
financing looking worse, but it will also be increasingly
difficult to protect benefits for those who rely on them most
if we delay action much longer.
As Commissioner Astrue said ``This year's Trustee Report
contains troubling but not unexpected projections about Social
Security's finances, and once again emphasizes that Congress
needs to act to ensure long term solvency of this important
program.''
According to the Trustees, the Old Age and Survivors
Program will be unable to pay full benefits beginning in 2035,
three years earlier than projected in last year's report.
That means workers who are 44 years old today will reach
their full retirement age in 2035, at which point everyone else
will face benefit cuts of 25 percent unless Congress acts.
In less than 4 years, Social Security's Disability
Insurance Program will be unable to pay full benefits.
The average monthly benefit for a disabled worker today is
only $1,111. In 2016, revenues will cover 79 percent of
benefits. That is a potential cut of about $233. That is real
money for those who are getting by on fixed income.
Social Security's last major reform was in 1983, then
Social Security faced an imminent disaster. In their 1982
annual report, the Social Security Trustees said, ``Without
corrective legislation in the very near future, the Old Age and
Survivors Insurance Trust Fund will be unable to make benefit
payments on time beginning no later than July 1983.''
Members of Congress and the President were able to develop
and ultimately pass on a bipartisan basis the Social Security
Amendments of 1983.
Despite the near failure of the Greenspan Commission and
despite the opposition of senior advocacy groups including
AARP, as this year's report makes clear, Social Security is in
trouble, but just as in 1983, I believe our nation has the will
to again save Social Security.
We should not follow the path Europe has taken by waiting
for a financial disaster to force changes that ultimately could
end up hurting the most vulnerable.
Today we will hear from Social Security's Public Trustees,
but we in Congress are trustees, too, and the public knows the
longer we wait, the more difficult the choices will become, and
the less time Americans will have to prepare.
With all the financial anxiety that Americans face, we
should not increase the burden on them by failing to fulfill
our duty in protecting our nation's most important safety net
program. We need to act now before it is too late.
Do you have an opening statement?
Mr. BECERRA. I do.
Chairman JOHNSON. What do they say, up from the grave he
arose.
Thank you again for listening. I will recognize Mr. Becerra
now for any opening statement you have.
Mr. BECERRA. Thank you, Mr. Chairman. I also want to thank
Mr. Stark for being here in the event I was not able to make
it. I got my daughter to her program on time and I am able to
be here. Thank you very much for being here to the two
gentlemen, our Trustees who are here.
I would just like to say what I have been saying for quite
some time. Social Security, even through the worst recession
since the Great Depression, is a program that people have grown
to rely upon and can trust.
Between 2007 and 2010, a typical middle class family lost
somewhere between $26,000 to $87,000 in their net worth. That
is about four out of every ten dollars of their assets and
savings.
Between 2007 and 2010, Social Security added $439 billion
to its trust fund surplus, while paying Americans their earned
benefits on time and in full.
Here we saw Americans with their private savings and
retirement pensions watching it go down at the same time during
this great recession. We saw Social Security continue to
increase the monies it had to pay out benefits to its
recipients.
Over 77 years now, through 13 recessions, Social Security
has added not one penny to our deficit or to our debt.
In 2011, Social Security provided earned benefits to more
than 55 million seniors, widows, disabled workers, and
children, while saving all the reserves in its trust fund to
pay future benefits.
Six out of ten seniors who get Social Security rely on
Social Security for a majority of their income. There are
1,300,000 children who are lifted out of poverty because they
receive Social Security.
In the long term, Social Security faces a manageable
challenge. It is not now and never will be broke.
This April, the Social Security Trustees warned that
without action, Social Security will be insolvent by 2033.
Let's be clear about what that means.
In 2033, worker contributions are projected to cover about
76 percent of Social Security's costs. The remaining balance in
Social Security's trust fund will pay another five percent of
costs. The shortfall is stable. After 2033, Social Security's
income will be enough to pay about three-fourths of earned
benefits until at least 2087, and likely longer after that.
Social Security's long term shortfall is a problem that we
need to address, but even when the reserves building up now run
out, Social Security will not be out of money. It will have a
shortfall of about .9 percent of GDP, just slightly more than
the cost of extending the Bush tax cuts for people who earn
more than a quarter of million dollars a year.
Social Security does face a crisis in the short term, one
manufactured by a series of budget cuts forced by House
Republicans.
If they continue, the cuts could delay benefits and damage
Social Security's well earned public image.
In 2011, the Republican-led a four year continuing
resolution cut the Social Security Administration's budget by
$600 million, despite rising numbers of Americans applying for
Social Security.
In 2012, SSA's budget was frozen below the 2010 level.
I strongly oppose these budget cuts which are kind of like
the cable company starting to bill you for a service while you
are at home waiting for them to show up and connect it.
Social Security's trust fund funds the entire cost of
paying Social Security benefits. In 2011, workers contributed
over $600 billion to Social Security's trust fund. Because of
Social Security's budget cuts in 2011, all Social Security
field offices started closing half an hour early each day.
Social Security permanently closed over 300 contact
stations and small field offices and waiting times for initial
disability decisions rose and are likely to be over 130 days by
the end of 2012.
SSA faces an even bigger cut through the sequestration
process, automatic cuts scheduled by the Budget Control Act.
Although Social Security benefits are protected, if Congress
does not act soon, on January 2, Social Security's operating
budget will be cut by over $1 billion.
$1 billion in cuts translates into 40 days in which Social
Security is shut down. Offices are closed and locked. No one
answers the phone. No applications processed. No one makes sure
benefit checks are sent to the right place.
Mr. Chairman, Social Security has been there for Americans
for 77 years. I hope we can continue to work to make it strong
for another 77 years. We can start by addressing the
preventable crisis of short-sighted budget cuts.
With that, I yield back the balance of my time.
Chairman JOHNSON. Thank you. We have one witness panel
today. Seated at the table are our two Public Trustees, Charles
Blahous, Ph.D., and Robert Reischauer, Ph.D.
Robert Reischauer, I would like to congratulate you on your
award last night at the National Academy of Social Insurance.
We are lucky to have someone with your breadth of experience
working as a Public Trustee. Thank you and congratulations.
Mr. Blahous, you are recognized.
STATEMENT OF CHARLES P. BLAHOUS, III, PH.D., TRUSTEE, SOCIAL
SECURITY AND MEDICARE BOARD OF TRUSTEES
Mr. BLAHOUS. Thank you, Mr. Chairman, Mr. Ranking Member,
all the Members of the Subcommittee. It is a great honor to
appear before you today to discuss the findings of the latest
Trustees' reports.
In view of the time constraints we are all under, what I
would like to do is gloss over most of the background
information in my written remarks and just proceed to some
primary points about Social Security financing.
The first simple point is that Social Security costs are
rising, most of that cost increase is going to play out from a
period that started in 2008 through 2035. The primary driver of
those cost increases is demographic.
If you think about Social Security costs, there are really
two main pieces. One is growth in the per capita benefit level,
and that is driven by the benefit formulas in law, but also
just the growth in the number of beneficiaries.
On the revenue side, the primary driver is growth in the
number of workers and the wages that are subject to tax. That
ratio of workers to beneficiaries is very important for Social
Security financing. That ratio is in the process of dropping.
We had 3.3 workers to support each beneficiary in 2007. Now
we are down to 2.8, and under our current projections, we will
be down to 2.0 by 2035.
Part of that is longevity increases, but the bigger and
more immediate factor is simply fertility patterns. We have
this big baby boom generation going onto the retirement rolls
prior to 2035.
Under our current projections, the combined Social Security
trust funds will be depleted in 2033. That is three years
earlier than we projected in last year's report. Each year what
the Trustees do is they estimate the program's actuarial
deficit, usually expressed as a percentage of the tax base, the
program's tax base, and this year, our projection is 2.67
percent of worker wages over the next 75 years.
That sounds arcane, but basically what that means is you
have a 12.4 percent payroll tax rate now, if you immediately
added 2.67 points to that, you would have the program in
balance for 75 years, or if you immediately had an equal
subtraction in benefit obligations.
That is an average figure. The shortfalls are smaller in
the near term, bigger in the long term. It is also a
substantial increase from last year's projection.
Last year, we were at 2.22 percent. It may not sound like a
big difference, but by Social Security norms, it is a pretty
substantial deterioration. We have only had one other report
over the previous 30 years that showed as much deterioration in
a single year as this year's report does. My colleague, Mr.
Reischauer, will review some of the reasons the outlook has
grown worse.
Also important, the figures I just cited pertain to the
combined trust funds. Social Security has two trust funds, and
under law, they each have to be kept solvent to maintain their
benefit payments.
The Social Security disability insurance trust fund is in
the more severe condition of the two. It is projected to be
depleted in 2016.
What is happening over time is the program is going to pose
under current law a greater financial strain on the larger
budget, and some of the strain is a result of discretionary
policy choices, of course, that are made along the way.
One of them, for example, this year, the payroll tax rate
has been cut from 12.4 points to 10.4 points. Social Security
has been held harmless for that change. There is a provision of
that law which transfers general revenues over to Social
Security so that its ability to finance benefits is not
affected.
Basically, what is happening is that part of the financing
responsibility has been moved from Social Security's payroll
tax to the general revenue side of the ledger.
A final point, there are significant costs to delay in
addressing the financing shortfalls. It is often cited that in
2033, we will have only enough funds to pay 75 percent of
scheduled benefits. It is important to bear in mind that does
not mean 75 percent of scheduled benefits for those retiring in
2033, that includes everybody. It includes people already on
the rolls in 2033, including many people who are drawing
benefits today.
If you were to say well, we do not want to cut benefits for
people already on the rolls in 2033, what if the benefit
reductions were confined to new claimants.
We would not be able to balance the system in that year
without a substantial unprecedentedly large tax increase even
if we cut off the entirety of benefits to new claimants.
By 2033, it is really too late, far too late to protect
previous beneficiaries from substantial dislocations.
If you start working through the problem backwards and you
say how soon do we have to act if we want to prevent reductions
for people in retirement, near retirement, low income
beneficiaries, and prevent a tax increase of a size we haven't
countenanced before, we would have to do that pretty soon.
Finally in closing, Mr. Chairman, I would just say that the
legislative achievement in creating the Social Security program
remains historically a remarkable one.
It has provided critical social insurance protections for
hundreds of millions of Americans. It has done this at
exceptionally low administrative cost. It has done it with
financing methods that are not without their critics but
nevertheless have been generally accepted by most of the
American public as relatively equitable.
That is a hard thing to do in legislation, and with
responsible bipartisan action, Social Security can continue to
fulfill its vital role, but such action must be prompt and
sufficiently decisive if the program is going to serve future
generations as well as it has served previous ones.
Thank you.
[The prepared statement of Charles P. Blahous, III,
follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman JOHNSON. Thank you. You said ``pretty soon.'' What
do you mean? Do you have a definitive date?
Mr. BLAHOUS. Well, you will get different answers if you
ask different experts. My own view is the window of opportunity
is closing relatively rapidly.
We already face a shortfall that is significantly larger
than the one that was repaired in 1983, which is probably the
high water mark politically of what can be accomplished in
terms of a short term resolution.
Obviously, each year we wait, the problem grows larger and
more difficult to solve.
Chairman JOHNSON. I understand that. When are we going to
fall off the cliff? That is what I am asking you. You can
answer later.
Mr. Reischauer, you are recognized.
STATEMENT OF ROBERT D. REISCHAUER, PH.D., TRUSTEE, SOCIAL
SECURITY AND MEDICARE BOARD OF TRUSTEES
Mr. REISCHAUER. Thank you, Chairman Johnson, Ranking Member
Becerra, Members of the Subcommittee. I appreciate the
opportunity to appear before you to discuss how the Social
Security program's financial outlook has changed since the last
Trustees' report.
To judge whether the financial health of Social Security is
improving or deteriorating, the media and the public tend to
focus on whether the years in which the two trust funds are
projected to be exhausted has receded or advanced.
By this measure, there has been a significant deterioration
in the financial health of the Social Security programs since
the 2011 report. The exhaustion date, as the Chairman has
mentioned, for the OASI program is now projected to be 2035,
three years sooner than was projected last year.
The DI trust fund exhaustion date has advanced two years,
from 2018 to 2016, and the exhaustion date for the two trust
funds combined has now moved to 2033, three years sooner than
projected last year.
A more comprehensive measure of the trust fund's financial
condition is the actuarial balance over a 75 year evaluation
period.
This measure is essentially the difference between the
annual income and costs of the program summarized over the 75
year period and expressed as a percentage of taxable payroll
over that period.
A negative actuarial balance, meaning an actuarial deficit,
can be interpreted as the percentage points that would have to
be either added to the current law income rate or subtracted
from the cost rate in each of the next 75 years to bring the
fund into actuarial balance.
The actuarial deficits of both Social Security trust funds
have deteriorated since last year's report. The DI trust fund's
actuarial deficit has worsened by seven one-hundredths of a
percent of taxable payroll. That for the OASI fund has
deteriorated by 38 one-hundredths of a percent of taxable
payroll, and the combined trust funds have weakened by 44 one
hundredths of a percentage point.
This deterioration in the combined trust funds is the
largest decline since the measure was first calculated in 1982,
save for the change that occurred in 1994.
There are lots of reasons why the actuarial balance can go
up or down from one year to the next. One of them, of course,
is that the valuation period changes. We add 2086 to the
valuation period and subtract 2011, and that accounts for about
nine percent of the deterioration in the actuarial balance.
Clearly, there was no legislation that affected this in a
significant way over the past year, so that is not a factor.
Demographic assumptions in this year's report are identical
to those that were assumed in the previous report, but we have
updated starting values and the transition from those starting
values to the ultimate values do affect the actuarial balance.
Specifically, more recent data has shown that birth rates
for 2009 and 2010 were lower than assumed in the last report.
Immigration in 2010 was a bit lower than was assumed in the
previous report. There was a slightly smaller initial
population than we assumed before.
A little less than half of the increase in the actuarial
deficit between 2011 and 2012 is accounted for by changed
economic assumptions and more recent information about the
economy's performance.
Two-thirds of this is related to updated starting values
and less optimistic assumptions about near term growth of the
economy.
Price inflation, as you all know, was higher than
anticipated between the third quarters of 2010 and 2011, and
rather than a seven-tenths of a percentage point COLA in
December of 2011, Social Security gave out a 3.6 percentage
point COLA. That makes a huge difference, as you can imagine.
Real interest rates in 2011 and those projected in the 2012
report are lower than assumed before. The new investments that
the trust funds make get less interest earnings than we thought
they would get when the 2011 report was put together.
Together, these economic factors make the gap between non-
interest income and costs over the next few years significantly
larger than projected in last year's report, but when the
economy has recovered, about the end of this decade, 2020 or
so, the gap between what was expected last year and what was
expected this year will be close to disappearing.
However, it is important to recognize that we made a new
assumption in the 2012 report that causes the gap between
income and costs to grow over the long run, and this had to do
with what we expect the changes in the average number of hours
worked per week to do.
In last year's report, we said hours were not going to
change in the future. In this year's report, we assumed they
will decline five one-hundredths of a percentage point a year.
We did this to reflect the aging of the workforce and the
belief that as productivity goes up, incomes go up, people will
want to take more leisure, and that will translate into working
a few less hours as it has in the past. This assumption
obviously acts to reduce taxable earnings and payroll tax
revenues from what was assumed in 2011.
We also made a change in our assumptions about the
incidence of disability. Compared to last year's report, the
ultimate age adjusted disability incidence rates were increased
by two percent for males and five percent for women. These are
more consistent with what the historical values and trends have
been over the last decade.
The deterioration in the actuarial deficits that I have
just summarized here today underscore the need for legislative
action to put Social Security on a more sustainable path.
The sooner we address this challenge, as Chuck as said, the
less disruptive the changes will be. If the reforms are adopted
soon, those most adversely affected can be given time to
prepare. The burden can be spread more equally across different
generations, and political animosity and public anxiety
associated with these unavoidable changes can be moderated.
The changes in the trust funds' financial well being that I
have discussed also call attention to the importance of
maintaining a strong economy and vibrant long term growth.
Let me conclude with a comment about the staffs of the
Social Security Administration and the Departments of Treasury,
HHS and Labor, with whom we worked to produce the Trustees'
reports.
They are an incredibly hard working, talented group of
analysts who are dedicated to providing the public and the
Congress with as objective and sophisticated set of estimates
as is possible, and I think we are all in their debt for the
service they provide to us.
Thank you.
[The prepared statement of Robert D. Reischauer follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman JOHNSON. Thank you. You went three minutes over.
[Laughter.]
Mr. REISCHAUER. That is a better performance than last
year. I want to be graded on the curve.
Chairman JOHNSON. Thank you. I am going to as customary
limit my time to five minutes and ask all my colleagues to do
the same.
Social Security was designed so that workers pay into the
system and earn their benefits. Franklin Roosevelt understood
the importance of making Social Security different from a
welfare program.
He once said ``We put those payroll contributions there so
as to give contributors a legal, moral and political right to
collect their pensions and their employment benefits.
With those taxes in there, no damn politician can ever
scrap my Social Security program.''
Mr. Blahous and Mr. Reischauer, in your messages from this
year's annual report, you point out payroll taxes represent
only 70 percent of the total Social Security income in 2011 due
in large part to general revenue transfers replacing lost
income from a payroll tax holiday.
If we continue to replace payroll tax revenues with income
tax revenues, how long before Social Security is no longer
perceived as an earned benefit, and what is that going to do
for public support?
Go ahead, Mr. Blahous.
Mr. BLAHOUS. I would say my answer to the second part of
your question is no one can know when that point might be
reached obviously, but that statement is in the report
obviously because we wanted to call law makers' attention to
the fact that Social Security historically has had a certain
rationale for its financing, and as you pointed out, it does go
back to Franklin Roosevelt.
If you go back and read his early statements, he placed a
very high level of importance on the notion that this was an
earned benefit. He did not want it to be merged in with the
general budget. That is why we have a separate trust fund. That
is why we have a separate payroll tax. That is why we have
trustees.
He was very concerned. In multiple statements he says if
you want to have a universal participation program, it costs a
lot of money to do that, so if you have it as part of the
general budget, it is going to be competing for funding with
other programs and would be subject to great political risk,
that the benefits of this program could be cut back.
He was very attentive to the idea of how do you structure
this program so it has enduring political support, and not only
FDR, but subsequent Social Security advisory councils over the
years have repeatedly said that one of the bases of the program
enduring political support is the idea that workers have earned
these benefits and they came out against--all these advisory
councils came out against funding the program from the general
fund.
Just speaking for myself as a Trustee, I think one of the
things we wanted to do was just draw law makers' attention to
the fact that if the program does continue to get transfers
from the general fund, it does potentially create a situation
where we would have a departure from FDR's intentions on that
point.
Chairman JOHNSON. It is not your personal money any more.
About $0.45 out of every $1.00 of public debt is held by
foreign governments, mostly China.
Mr. Blahous, if we continue the payroll tax holiday and the
general revenue transfers to replace lost payroll tax revenue,
do we risk turning Social Security from a program paid by
Americans to one dependent on the whims of foreigners who
invest in our bonds?
Mr. BLAHOUS. I think it is certainly the case that the
general revenues that were transferred to Social Security along
with the payroll tax cut were financed with debt. They were
financed by increasing the deficit. We cut payroll taxes and
added that amount to the deficit.
Certainly, while there is an ongoing argument over who
really finances the redemption of bonds held in the trust fund,
clearly, in this instance, this would be case of the financing
for Social Security being provided by the people who invest in
U.S. Treasury bonds.
Chairman JOHNSON. Can you tell me why you think tax
increases are no answer for fixing Social Security? It seems to
me to fix Social Security for good, we need to make sure our
reform efforts align tax revenues with benefit outlays on a
sustained basis. That did not happen during the last major
reform.
Seventy-five year solvency was achieved by building annual
surpluses in the near term followed by growing annual deficits
in the long term, even though that was not intended at the
time. Is that correct?
Mr. BLAHOUS. That is correct, although I have to say that
if you were to bring ten experts up here, you would have a few
that would disagree with me on the point.
If you go back and study the 1983 reforms, one of the
things that is striking about them is that they did not measure
financial success the way we do it now.
When they analyzed Social Security's future balance, they
did not count the carry over balance of the trust fund. They
did not count interest earnings of the trust fund.
They used a different actuarial method that basically
presumed that all benefits in the future would be paid by
taxing the wages of future earners.
If you read the comments of people who developed the
reforms, whether they are Jake Pickle or Senator Pat Moynahan
or Robert Myers, who was the Executive Director of the
Commission, they said in multiple places that it was their
intention to keep the program financed on a pay-as-you-go
basis.
The fact that they wound up with a solution that had big
surpluses in some years and big deficits in other years, was
not as intentional as many people now believe.
What they were trying to deal with was a short term
emergency, trying to make sure the benefit checks did not stop
in 1983, and they were trying to arrive at an average actuarial
balance over the long term.
As you point out, that resulted in an unsustainable
solution because as time went on, the surplus years faded into
the past and more deficit years appeared on the horizon.
Again, they were trying to do a lot of things under
emergency conditions in 1983. The intention is not to critique
what they did, but simply to point out that as they defined the
long term balance, they did not give the same level of
attention to what was happening on an annual basis that we do
in the Trustees' reports now.
Chairman JOHNSON. Okay. I presume you agree with him?
Mr. REISCHAUER. Actually, I probably would disagree with
all three of the answers that Chuck gave.
[Laughter.]
Mr. REISCHAUER. That is why you have two Trustees. Do you
want me to disagree or shall I keep my lips sealed?
[Laughter.]
Chairman JOHNSON. I will let Mr. Becerra ask. My time has
expired. Thank you.
Mr. BECERRA. We will just leave it at there is disagreement
on that.
Let me ask the two of you--by the way, thank you for your
testimony and the work that you do as Trustees, we appreciate
that.
Both of you mentioned in part of your testimony the
deterioration in the outlook for the program, which is why I
think all of us should be trying, as Mr. Blahous said, dealing
with this sooner than later.
I think your pie charts in your testimonies, the
information you provided, show a great portion of that
deterioration occurred as a result of the recession, which hit
pretty hard.
It became pretty clear that when you lose jobs in America,
you lose workers who are paying their FICA contributions, their
Social Security contributions, fewer workers contributing to
Social Security, less money going into the pot to pay out
benefits.
Job one for Congress should be creating jobs, helping the
private sector create those jobs. You get more folks to work.
It does not just help them and their families, it helps Social
Security because there is more money going into the system, the
Social Security system and the trust fund.
Mr. Reischauer, you mentioned immigration passingly. Does
the fact that we have had, unlike other countries, a consistent
flow of immigrants over the last several decades help the
Social Security system and its trust fund when it comes to
being able to pay out benefits?
Mr. REISCHAUER. That is a very complicated question. In
fact, the influx of immigrants has increased the labor force,
it has increased the number of individuals paying payroll
taxes, which over the short run, clearly helps the ability of
the program to pay benefits to retired and disabled workers and
survivors.
Mr. BECERRA. I think the other part of that that you do not
mention is in the long run, if they become recipients of Social
Security benefits, then they will draw as well.
It is one of those things where it is not plus an automatic
plus because they at some point will qualify to receive those
benefits as well.
Mr. REISCHAUER. Yes, but it is very complicated and will
depend on what their earning patterns are over time and
different groups of immigrants have different pluses and
minuses in sort of a narrow fiscal sense.
Mr. BECERRA. Or if they stay in the country. Some of these
folks will move back.
Mr. REISCHAUER. Many leave and do not end up collecting
benefits.
Mr. BECERRA. Right. I have some numbers here that show that
between 2007 when the recession was starting and then got
really deep through 2010, nearly 6,000 companies in this
country terminated their pension plans.
In 2009 alone, those terminated pension plans were short $9
billion of what they needed to pay out in benefits to the
workers who had those pensions under those companies.
During that time, 2007 to 2010, Social Security did not
lose any money, did it?
Mr. BLAHOUS. No, Social Security continued to make payments
in full and the nominal balance of its trust funds continued to
rise.
Mr. BECERRA. Right. We all know the examples of Circuit
City that shut down its pension plan. We remember Enron when it
went bankrupt, and how those companies left their employees and
their pensions.
The reason why I think it is so important, you mentioned
how we should be acting now to try to resolve any longer term
issues for Social Security, is that we do not want to get to
the point where you compare Social Security to Enron or Circuit
City.
Fortunately, we still have some funds, even if Congress
cannot get its act together, to keep the Social Security system
going smoothly for the next 20 some odd years, and even after
that it would be paying out 75/76 percent in benefits.
I do not think anyone today is paying into Social Security
to get 75 percent of what today's beneficiaries are getting.
I hope what you all will continue to do is give us the
recommendations that you feel will help us move toward
something sooner than later.
I think most people are getting to the point of agreeing it
is pretty simple math, as I think you mentioned, Mr. Blahous.
You can go to the benefit side. You can go to the revenue side.
You can figure out a way to get yourself in an actuarial
balance for the next 75 years.
Hopefully, what we will do is we will sit down at some
point soon in Congress and try to come up with that tough
political response.
Appreciate your testimony here today and your service with
the Trustees, and I hope you will continue to come and testify
before this Committee. Thank you. I yield back.
Chairman JOHNSON. Thank you. Mr. Brady, you are recognized.
Mr. BRADY. Thank you, Mr. Chairman. We hear these days that
everything is doing fine with Social Security on Capitol Hill.
No need to act. Things are not fine with Social Security.
As Chairman Johnson pointed out, in the last year, America
borrowed roughly $140 billion, much of it from China and other
foreign investors, just to pay our Social Security benefits.
This year we will borrow $150 billion roughly from China
and other foreign investors just to pay our benefits to
seniors. That is not fine.
If you do not like that, get used to it, because your
report said we face permanent deficits forever in Social
Security programs.
We are told maybe this is due to the recession but truth is
we are told the economy is doing better but this had the
largest single deterioration since 1994, Social Security, so it
is getting worse, not better.
I have three questions. I would hope we could have a no
spin zone here and just ask the Trustees, those responsible for
the financial stability of Social Security, just to give us
your best advice to Congress and the White House. One, should
Congress and the White House continue to delay reforms on this
important program, or should we act now?
Mr. Blahous.
Mr. BLAHOUS. I am an advocate of acting as soon as
possible.
Mr. BRADY. Mr. Reischauer.
Mr. REISCHAUER. I think speedy action is called for.
Mr. BRADY. How much time?
Mr. REISCHAUER. Whether the actual changes in policy you
make need to be implemented next year or after is a totally
separate issue. This is an area where we generally phase policy
in over a long time.
Mr. BRADY. You both made the point that if we do not act
soon, it will be impossible to protect current and near
retirees. Again, your advice to us. What is the time table? How
soon do we need to act? This year? Next year? Your advice to
us.
Mr. REISCHAUER. I think you should act when the climate is
right, when changes are being made----
Mr. BRADY. I am asking you as a Trustee looking at the
numbers, how much time would you say we have to act in your
belief?
Mr. REISCHAUER. I would hope that you would act within the
next five years.
Mr. BRADY. Mr. Blahous.
Mr. BLAHOUS. Yes, with the disclaimer, if you were to line
up ten experts here, I am probably on the pessimistic end of
those ten with respect to how bad it is going to be for the
future of the program if we delay too long, but I certainly
agree definitely within five years. I would hope to do it even
faster.
Mr. BRADY. The payroll tax holiday was important to many
families, but it did blow a hole in Social Security's revenue
stream. It was backfilled by general revenue. We know that
cannot continue.
Again, no politics in this, your advice as Trustees, should
we continue the payroll tax holiday or should we restore the
full stream of revenue to Social Security?
Mr. Blahous.
Mr. BLAHOUS. Here I am speaking very much for myself. I
would urge that Social Security go back to its 12.4 percent
rate.
Mr. BRADY. Restore to the full stream. We have to deal with
how we do that. Your advice would be restore the full amount of
money?
Mr. BLAHOUS. That is a personal view. Obviously, not the
Board of Trustees.
Mr. BRADY. I understand. Mr. Reischauer?
Mr. REISCHAUER. Mine is obviously a personal view, too, but
I would phase it out with all deliberate speed.
Mr. BRADY. Thank you, Mr. Chairman.
Chairman JOHNSON. Thank you. Mr. Schock, you are
recognized.
Mr. SCHOCK. Thank you, Mr. Chairman. It does not seem like
the news is getting much better. I want to get a little
parochial here. You said we need to act soon. I am just curious
what the younger generation of Americans have in store for
themselves if we don't act soon.
Mr. BLAHOUS. Two part answer. The mathematical part of the
answer is a net income loss. There is a table in the Trustees'
Report that says if you just held all current participants in
the system harmless, current benefit formulas, current tax
formulas, then people coming into the system would lose a net
of about four percent of their taxable wage income to Social
Security. That is a net, that is after they receive all
benefits.
Those income losses would be higher on the higher income
side but they would also be present on the lower income side.
You would have whole generations that were losing money net
through the program.
That is the mathematical answer. Getting back to the
questions that were asked earlier, I think they would also face
the risk that we might not be able to generate the political
will to keep the program operating on a self financing basis.
Then if we could not keep the program going on a self
financing basis and had to merge into the general fund or
subsidize it from the general fund, I think they would lose
something else, which is sort of the legacy of Social Security
as a separate stand-alone self financing system that has a
certain degree of political protections that other Federal
programs do not have.
Mr. SCHOCK. Mr. Reischauer.
Mr. REISCHAUER. You asked young generations, what should
they expect, and the answer is less income in retirement years.
Future generations will run more risk with respect to
disability as well, payments they would get in disability and
as survivors.
They need to divert more of their income into private
pension plans or 401(k)s or other retirement vehicles.
Mr. SCHOCK. Why are you saying they would need to do that?
Mr. REISCHAUER. If they wanted to maintain adequate incomes
in retirement.
Mr. SCHOCK. Because of Social Security?
Mr. REISCHAUER. Social Security payments would be less for
them.
Mr. SCHOCK. How much less?
Mr. REISCHAUER. Well, as Chuck explained and the Chairman
and others have mentioned, Social Security would be able to pay
about three-quarters of the benefits now promised.
Mr. SCHOCK. That is based on what age category?
Mr. REISCHAUER. This would be across the board for all
existing beneficiaries and future beneficiaries starting after
2033.
Mr. SCHOCK. For the next 100 years?
Mr. REISCHAUER. Well, we do not go out that far. We go out
through 2086. It stays roughly in that area.
Mr. SCHOCK. Assuming the same number of people live the
same number of years and have the same number of children?
Mr. REISCHAUER. No, I mean we do vary this over time in our
projections according to the best information that we have
available.
Mr. SCHOCK. What happens to people that are not as young,
perhaps they are 50, and they are 15 years from retirement?
What is going to happen to their Social Security if we do not
do anything?
Mr. BLAHOUS. The literal no action scenario is that--
literal no legislative action would be a 25 percent benefit
reduction in 2033. Those people presumably would collect full
benefits for some years and then experience a sudden benefit
reduction in 2033.
Obviously, it is unlikely that is the way it would play out
in practice. Congress would probably not permit a sudden 25
percent benefit reduction.
There would probably be some alternative mix of pain
allocated between beneficiaries and taxpayers, but the literal
no action scenario is 25 percent benefit reductions.
Mr. SCHOCK. Are you assuming we would be responsible?
Mr. BLAHOUS. Let's just say there is no historical
precedent for Congress allowing a sudden benefit cut of that
magnitude.
Mr. SCHOCK. Is there historical precedent for Congress
allowing Social Security to become this broke?
Mr. BLAHOUS. No. That is actually a very important
question.
Mr. SCHOCK. Has it ever been this broke?
Mr. BLAHOUS. We have never had an actuarial deficit as
large as it is now. We have come closer to the insolvency
point. In 1983, we were a few months away from not being able
to send out the benefit checks, but the size of the current
actuarial imbalance is larger than it has ever been, at least
since before the 1983 reforms.
There was an indexing mistake that was made in the 1970s,
and there was temporarily a huge long term deficit that was
created by that indexing mistake that was fixed in the 1977
amendments.
Since that correction, this is the largest actuarial
deficit we have seen since prior to the 1983 reforms.
Mr. SCHOCK. Mr. Reischauer, do you agree?
Mr. REISCHAUER. Yes.
Mr. SCHOCK. If you have a Republican and Democrat to agree,
maybe we should leave Capitol Hill now.
[Laughter.]
Mr. SCHOCK. Thank you, Mr. Chairman.
Chairman JOHNSON. Every now and then we do. Mr. Stark, you
are recognized.
Mr. STARK. Thank you, Mr. Chairman. Thank you for holding
this hearing and thank our witnesses for their service.
I have to mention, Mr. Blahous, before you choose to
criticize my testimony, we both have the same background. I
notice you have a doctorate in physical chemistry.
I also have a great deal of experience in physical
chemistry. I think I took ten semesters of it at MIT. However,
it was all second semester chemistry that I had to repeat over
and over again before I could pass it, but it is a great
background.
The Republicans want to kill Social Security. I think that
is quite obvious, and turn it into a voucher plan.
Mr. BRADY. Mr. Chairman, if the gentleman would yield on
that.
Mr. STARK. I will be happy to.
Mr. BRADY. Mr. Stark, as you know, Republicans are very
strongly supportive of Social Security. Our mom's and our
dad's----
Mr. STARK. Rich people. Let the poor people pay for it. I
do not buy that. The Republicans want to kill Social Security
and Medicare and turn them into voucher systems.
Mr. Reischauer, actually, they are stealing your thunder.
You are one of the original founders and your thunder, of
course, is to have Medicare have premium support.
Fortunately, it also gave you an umbrella for that
thunderstorm, which was a guaranteed benefit.
Would you support the idea of premium support without a
guaranteed benefit?
Mr. REISCHAUER. As you know, Mr. Stark, the term ``premium
support'' came out of an article that Henry Arron and I wrote
in 1995 suggesting that there be private or non-profit options
for Medicare beneficiaries along with fee for service, that the
benefit be a defined guaranteed benefit, and that the payment
be one that was indexed to the growth of health care costs over
time.
Our belief was that this might generate more efficient
delivery systems and better care for America's seniors along
with some cost savings.
The emphasis was on the quality of care and offering a more
diverse set of delivery systems.
Mr. STARK. Thank you. The Affordable Care Act, which the
Republicans would like to defeat, according to actuaries, it
would extend solvency eight years longer than if the
Republicans had their plan to kill health reform.
Would you suggest that is correct?
Mr. REISCHAUER. Yes. There is a projection that HI costs
would be reduced and the trust fund would be solvent----
Mr. STARK. I ask unanimous consent to submit for the record
a CMS press release with the Trustees' report which states that
``Without the Affordable Care Act, the health insurance trust
fund would expire eight years earlier, in 2016.''
Mr. Reischauer, can you put a dollar number--I keep hearing
that Social Security is going to go broke in 20 years,
something like that. What will the total negative amount be?
How many billions would you guess if you project that, it is
going to be short over the total period?
Mr. REISCHAUER. Over the next 75 years?
Mr. STARK. Is it going to take 75 years to go broke?
Mr. REISCHAUER. No. It will exhaust the trust funds in 2033
if you combine the trust funds. I do not have a number at the
tip of my tongue.
Mr. STARK. Any idea, Mr. Blahous?
Mr. BLAHOUS. The projections have the trust funds solvent
through 2033. The shortfall would be 2033 through the end of
the 75 year period. We have a present value estimate of that,
about $8.6 trillion.
Mr. STARK. $8.6 trillion. Do you have any idea what the two
wars we are fighting and not paying for costs over the same
period of time?
Mr. BLAHOUS. I do not.
Mr. STARK. Would you be surprised to know it probably cost
a lot more than that, and I am not hearing anybody on the other
side ask that we pay taxes, particularly those of us who maybe
have high incomes, like Members of Congress, we are not being
asked to contribute anything to pay for that war. Lower income
people maybe are.
Thank you, Mr. Chairman.
Chairman JOHNSON. Thank you. Without objection, the CMS
memo that you referred to will be entered into the record.
[The information referred to follows: The Honorable Pete
Stark]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman JOHNSON. Mr. Marchant, you are recognized for five
minutes.
Mr. MARCHANT. Thank you, Mr. Chairman. My question is about
the actual mechanics of how when you approach let's say 2016
and the disability shortfall begins to appear in the disability
program. What is the number that Congress would need to
appropriate out of general funds in those threshold years just
to maintain the benefit?
Mr. BLAHOUS. Just as a very crude estimate, it is about $30
billion a year, the shortfalls that appear from 2016 through
the rest of the decade.
Mr. MARCHANT. We look at things over ten years usually.
Mr. BLAHOUS. They would start in 2016. It would be about
$30 billion a year, I guess, over the last six years of that
valuation period.
Mr. MARCHANT. Is there a trigger put into the law where the
Congress immediately is confronted with having to make that
legislative decision, or will it be a legislative decision
through the entire Congress and then be signed by the
President?
Mr. BLAHOUS. The way the law reads is that the disability
insurance program can only make payments from monies that are
in its trust funds. If you assume Congress does nothing, then
basically you would have--when the trust fund balance got down
to zero, you would have delays in outgoing benefit payments
until incoming tax revenues came in to finance more benefit
payments.
The effect of that through just delaying payments would be
to reduce total payments on an annual basis by about 21 percent
per year.
If you wanted to maintain full scheduled benefit payments
100 percent, you would have to find other revenues and put them
in the trust funds to allow the full scheduled benefits to be
paid.
Mr. MARCHANT. You would basically have an appropriation
that would be made into the trust fund and the trust fund would
basically then make its payments adequately?
Mr. BLAHOUS. Right.
Mr. MARCHANT. If we reach that threshold in the main Social
Security trust fund, what would be the amount of money needed
that Congress would have to appropriate in that first year,
based on the projections that you are making now, to keep the
benefit at 100 percent, when we reach the 75 percent threshold?
All of us get that warning when we open our yearly statement
and look at it.
Mr. BLAHOUS. Right now, I do not have the precise dollar
figure off the top of my head, but just to put it in today's
terms, it is about 25 percent of scheduled benefits.
Today, the cost of paying benefits is a little bit shy of
$800 billion. It is about $790 billion per year.
If you wanted to think of it in today's terms, the amount
by which you would be short, in today's equivalent, a little
bit shy of about $200 billion a year.
Mr. MARCHANT. $200 billion. That would be the choice
Congress would have at that point, to keep benefits basically
at the projected level. Congress would have the decision of
just simply appropriating the money to go in?
Mr. BLAHOUS. Yes. This cuts to a point I made earlier about
the difficulty of the choices Congress would face. Obviously,
the path of least resistance at that point is just to turn to
the general fund and say here is another $200 billion. It will
be much higher in nominal terms in 2033. The equivalent of $200
billion and put it into Social Security.
Obviously, that would end the principle that Social
Security was supposed to be financing itself.
If you wanted Social Security to finance itself, you would
either have to raise payroll taxes or cut benefit payments by
enough to fill in that gap.
Mr. MARCHANT. By doing that, you would completely end the
philosophy of a self-paying system, and you would transfer it
like many of the states have done. They have gone in and raided
their pension plans over the years to where the pension
obligations in many of the states now is just a current
appropriation.
They have depleted their trust funds, borrowed against them
or cashed them in to where instead of it being a payment out of
the trust fund based on earnings, they just simply have a fixed
liability to them.
Mr. BLAHOUS. That is right.
Mr. MARCHANT. Would that law just become law by the fact
that we had not fixed the system?
Mr. BLAHOUS. You would have to take an affirmative
legislation action to support the program with general
revenues. Under current law, there is no provision for doing
that. The program cannot borrow from the general fund, cannot
receive, without additional legislation, an appropriation from
the general fund.
You would have to change the law in order to have that
result.
Mr. MARCHANT. I think it is reasonable to expect that most
of us will still be here in 2016. I certainly hope to be.
That threshold that you are talking about in the Social
Security retirement fund, we are approaching with the
disability fund.
Whether we are acting or not acting, we are making some
very conscious decisions on how we are going to handle this
disability trust fund.
I suspect the mentality of Congress at this point is well,
we will just appropriate the money so that no one loses their
benefit.
When you make that conscious decision, are you not making a
much bigger decision at that point?
Mr. REISCHAUER. In the past, when faced with this same
challenge, the Congress has reallocated tax revenues from the
OASI system, the old age survivor system, to the disability
system; tweak the division of the total payroll tax between the
two trust funds, thereby avoid making a difficult decision.
Mr. MARCHANT. Thank you, Mr. Chairman.
Chairman JOHNSON. The gentleman's time has expired. Mr.
Smith, you are recognized.
Mr. SMITH. Thank you, Mr. Chairman, and thank you to our
witnesses.
Mr. Blahous, we frequently hear actually that Social
Security is a separate account and does not attribute to the
deficit. I think my colleague, Mr. Marchant, was touching on
some of this.
In your testimony, you indicate that Social Security
operations are currently adding to the unified Federal deficit
and will add substantially more in the years to come.
Could you expand on that?
Mr. BLAHOUS. I think perhaps the best way for me to answer
this is to say the parts of my answer that I think all analysts
would agree with, and then I will get into the part that there
is some disagreement on among analysts.
I think all analysts agree that to the extent Social
Security is supported by its own payroll tax revenue or by the
taxation of benefits, to that extent, it is not adding to the
Federal budget deficit.
I think most analysts would also agree that to the extent
Social Security is receiving a subsidy from the general fund,
like the general fund transfers that accompanied the payroll
tax cut, that portion does add to the deficit.
Where you get into the murky area where analysts argue with
each other has to do with the interest payments that are made
to the Social Security trust fund.
Right now, to a very large extent, from now to through 2033
and certainly into the 2020s, Social Security is going to
subsist to a large extent based on the interest payments from
the general fund.
If you ask two different analysts to interpret what is
going on there, you are going to get two different answers.
From a mechanical standpoint, the payments of interest go
from the general fund to Social Security. You could say from a
mechanical and unified budget standpoint, those interest
payments do not represent money coming into the U.S. Treasury
and therefore, represent money going to Social Security without
reducing the unified budget deficit, and then representing an
extent to which Social Security is adding to the overall
deficit.
You will also have a school of thought, and I do not agree
with this, but there is also a school of thought that says
those interest payments represent the extent to which Social
Security has reduced the amount of borrowing in the past that
the Federal Government has had to do, and therefore, represents
a reduction in unified budget interest payments.
Therefore, to the extent Social Security receives interest
payments, it is not adding to the unified budget deficit.
You are going to have competing views on that. I am on one
side of that discussion and other people are on the other.
I think with respect to other parts of Social Security,
there is less ambiguity. I think to the extent that the program
is receiving transfers of general revenues, it is clearly
adding to the deficit, and to the extent it is relying on its
payroll tax income, it clearly is not.
Mr. SMITH. Thank you. I will yield back.
Chairman JOHNSON. Thank you. Mr. Berg, you are recognized.
Mr. BERG. Thank you, Mr. Chairman. Thank you to the
witnesses.
Mr. Reischauer, I appreciate your article in 1995 about
premium support and where that would go.
My question to you is what happens when--I am sure at the
time people called that ``vouchers''--people said that is going
to wreck Medicare, what was your response back then?
Mr. REISCHAUER. Our response was that changes were
unavoidable, that this was a promising approach towards
providing beneficiaries with more choice, possibly higher
quality coordinated care, and possibly a reduction in
Government spending from competition among plans.
Mr. BERG. Thank you. Jumping back, I kind of wanted to
follow up on a question that Representative Marchant had on the
Disability Insurance Trust Fund.
We talk about how we have one to five years to make some
decisions. I am sitting here looking at 2016 and I am saying
that is not five years. That is four years. If you are going to
not fall off the cliff, you are probably talking one to three
years to do something.
As you explained the reality of how things may happen and
where money would come out of the other fund to kind of
subsidize this fund, if you pooled those two funds, what is the
year that we are not going to cover the benefits?
Right now, we are saying the one is 2035 and this one is
2016. If the old age started subsidizing this other one, at
what point is it going to bring that down?
Mr. Blahous.
Mr. BLAHOUS. Basically, right now the old age and survivors
fund, the so-called ``retirement fund,'' that is scheduled for
depletion in 2035. Disability is 2016.
If you put them together, the combined funds would be under
in 2033.
Mr. BERG. It would be the same?
Mr. BLAHOUS. 2033 is the figure that we often throw around
in the vernacular, because it refers to Social Security as a
whole. That is the figure you hear the most.
If you split it into the two funds, one of them is 2035 and
other one is 2016.
Mr. REISCHAUER. The 2033 assumes that you re-jigger the
allocation of the payroll taxes between the two trust funds?
Mr. BERG. For the old age and survivors, you are seeing
today with this report it is still 2035.
Mr. REISCHAUER. It is not ``still.'' It was 2038 last year,
right?
Mr. BERG. It has come down from 2038 to 2035. The other
point, I just want to be clear, when you present value this
unfunded liability, we are talking about $8.6 trillion, which
is over two years of all Federal spending, but that includes
2.7 using that money within the trust fund.
Mr. BLAHOUS. You are right. That is basically the size of
the actuarial deficit on top of redeeming the trust fund, and
redeeming the trust fund, basically you are saying redeeming
the trust fund counting it as an asset and then the shortfall
from 2033 out to the end of the valuation period is where that
$8.6 trillion comes from.
Mr. BERG. If you did not value that Trust Fund amount, you
are $10 to $11 trillion in that unfunded liability to make it
solvent?
Mr. BLAHOUS. That is right.
Mr. BERG. I think there are a lot of different terms that
are being used, and sometimes it makes it confusing. It cash
flows for a while here, but it is not solvent.
From my perspective, I just really think we have to look at
these facts and the facts are the facts, and if it is not
solvent long term, and quite frankly, if we care about Social
Security, we need to do some things to ensure it is solvent.
I obviously personally am very open to any ideas from
anywhere. I think the solution needs to be bipartisan. I think
that is the only way you can present it to the American people.
I am just hopeful we will get some of those bipartisan
solutions coming forward.
Thank you, Mr. Chairman. I will yield back.
Chairman JOHNSON. Thank you. You can always raise the age
to 100, you know. That might take care of it.
I am going to ask one more question. Mr. Blahous, in order
to fix Social Security for good, we need to make sure our
reform efforts ultimately align tax revenues with benefit
outlays on a sustained basis, and that did not happen during
the last major reform in 1983.
Then 75-year solvency was achieved by building annual
surpluses in the near term followed by growing annual deficits
in the long term, even though that was not intended by the
reformers at that time. Is that correct? Could you talk about
that?
Mr. BLAHOUS. Again, and my colleague, Mr. Reischauer, may
want to leap in and disagree, but my read of the 1983
amendments is that what they intended to do and what they
actually did were somewhat different.
I think they aimed at avoiding an immediate insolvency
problem. The benefit checks were not going to go out in a few
months and they wanted to prevent that from happening.
They also aimed at a long term actuarial balance. If you
actually go back and read the documents of the deliberations
and the memo's of the Greenspan Commission exchanged, and how
they measured fiscal success, it is very clear they did not
look at it the way we do it now.
When we make a measure of the condition of the trust funds,
we count the carry over balance of the trust fund. We count the
interest payments of the trust fund. We basically treat the
trust fund as an asset in Social Security, and therefore,
within that mindset, you could certainly do something that
builds up the trust fund and then draws it down over a period
of time.
That is not actually how they went about it. What they did
is they used a different method for calculating the program's
financial condition. It was called the ``average cost method,''
basically.
It assumed that in any given year, you were going to fund
the program by incoming wages from workers. They did not count
the carry over balance of the trust fund. They did not count
the interest payments of the trust fund.
If you read the commentary of the Greenspan Commission
members and the staff director, they say it is our intent to
keep the program going on a pay-as-you-go basis, not to have
big imbalances from one year to the next.
Jake Pickle wrote a letter, my memory is slipping, but
either to the New York Times or the Wall Street Journal, saying
the public would never stand for a big trust fund build up
because they would not trust the Government to control
trillions of dollars of investments and save the money, so we
want to keep this program going on a pay-as-you-go basis.
What happened instead was they got big surpluses in some
years and big deficits in other years, but that result was not
fully apparent until so late in the legislative process, that
they could not really go back and revisit it.
Obviously, what they were dealing with was a big emergency.
They did not want to disrupt the political deal that had been
reached, so they got a result where the program's actuarial
balance on paper was a little bit more apparent than real,
which is why it has slipped since then.
Chairman JOHNSON. If we get a solution this time, there are
going to be political consequences as well.
Do you care to comment, Mr. Reischauer?
Mr. REISCHAUER. Yes, I do care to comment. There is a real
dilemma here. If you operate a program like this on a strictly
pay-as-you-go basis, then you are saying as demography changes
and changes may be in unexpected ways or trend economic growth
changes, you are going to have to raise taxes or lower taxes or
raise benefits or lower benefits.
For a program that is designed to provide the American
population with some kind of assurance that it is going to be
able to plan its retirement or how much insurance it needs for
its potential disability, that is not really a satisfactory way
to go.
The other option is you can build up reserves and deplete
reserves over time.
I agree with Mr. Blahous that the intent was not to build
up these big reserves. The future course of demography was not
fully appreciated by those responsible or anybody at that time.
Was the baby bust a permanent phenomenon. We have had huge
social changes that have gone on in the last 30 to 40 years.
Smaller family size, more immigration, more women in the
workforce, et cetera, that make these things very hard to put
in place and then stick with your decision for the next 75
years.
I do not think there is a right answer to this question.
Chairman JOHNSON. Thank you, sir. Mr. Becerra, you have one
more question?
Mr. BECERRA. Yes. To sort of feed off this, I think often
times we have this conversation because we are accustomed to
having this conversation.
I think we do not explain it in terms that most Americans
will look at it from.
Essentially, back in 1983, when Social Security was nearing
a point where it would not be able to pay all benefits,
Congress, working with President Reagan, worked to deal with
that.
The result was a system where Americans paid a little bit
more, those who retired got a little less in benefits. The
result was this reserve that was being built up. Americans have
since 1983 been contributing more into the system that has been
needed to pay recipients, the beneficiaries.
I think most Americans would say if I gave you hard cash,
whether you are a bank or any other place where I can store my
money, and you tell me you are going to pay me interest on that
cash, that you are expecting at some point to get to collect on
that cash, essentially by law, that is what we did.
We told Americans that when they deposited their Social
Security contributions from their paycheck to the Government
for Social Security, what was not used--actually, all of it
when it comes in goes into Treasury bonds.
From there, the Social Security system uses what it needs
from those Treasury bonds to pay for benefits. It cashes in
those Treasury bonds.
Because it has not needed to cash in all of those Treasury
bonds to pay for current retirees, it has been building up this
surplus, and that surplus has been earning interest, small,
because Treasury bonds earn less interest than some more risky
investment on Wall Street, but it has been earning interest.
That is the $1.6 trillion in interest that has been earned.
Mr. Blahous, you are saying some people would question
whether that is real money because it is interest and it was
essentially a transaction between one arm of the Government,
Social Security, to the other arm of Government, which is the
general operating budget of the Federal Government.
Those Treasury bonds are real. As the Chairman pointed out
earlier, 45 percent of our debt held by the public is owned by
foreigners. They own that debt and they get to collect on it
because they own Treasury bonds.
Those who say it is not real money that Social Security
holds, guess what, we are in pretty good shape because 45
percent of our debt that is held by foreigners is not real
money either, so we do not owe the foreigners.
If you do not owe Social Security to Americans that paid
into it, then we do not owe the foreigners either.
That is why I do not understand the logic of those who say
it is not real money. Americans paid real money into the
system. It was secured by the most secure form of currency
there is, which is a Treasury bond.
To say it is not real money simply because it was done by
Social Security giving the money to the Government and getting
a Treasury bond to hold onto that money, I think is a real
either mistake to say or a real injustice to the American
people who continue to pay into the system today.
That reserve is going to continue to grow for several more
years before we have to start using it to pay for benefits.
I think the public will want to understand--I did the quick
math on this. In the 77 years Social Security has been around,
you and I and everybody who works and has worked, we have
contributed about $14 trillion into Social Security with our
paychecks, our FICA contributions.
In that 77 years, the calculation was that we have used up
about $13 trillion in paying out benefits. Hard cash left over,
simple math, 14 minus 13, there is $1 trillion that Americans
have contributed in cold hard cash to Social Security that has
never been used.
That has helped produce part of that reserve. Because for
decades that reserve has been gaining interest because it is
held in Treasury bonds, it has added another $1.6 trillion.
I think most Americans would tell you if you only wanted to
give them back their $1 trillion and not the 1.6 they earned in
interest, if this were a bank, we would have a big run on that
bank. In fact, we would probably burn that bank down.
I think we want to be very careful when we talk about funny
money for Social Security. Either we tell China and the rest of
the world that we are not going to pay them because they have
the same funny money, or we should keep our obligations to
Americans who contributed money.
The final point I want to make is this, and my colleague
friend from Texas, Mr. Brady, mentioned that Social Security
faces a permanent deficit forever, I want to make it clear, and
I think Mr. Blahous and Mr. Reischauer would concur, under the
law, Social Security cannot run deficits.
Is that correct?
Mr. BLAHOUS. That is correct.
Mr. BECERRA. Social Security will never face a deficit.
What we do face, and I think, Mr. Blahous, you have used the
right word, an ``actuarial deficit.'' The actuaries see the
difference between what we are collecting and what we hope to
pay out, and there is a deficit there, and that is what we have
to tackle sooner than later.
Can the Social Security system ever run deficits? By law,
it can never run deficits. The cold hard fact is we would have
to say--I think Mr. Blahous said, we would have to tell
Americans in 2033 guess what, all of a sudden your benefit went
from 100 percent of what you have been getting to 75 percent,
which would be cruel, and that is what we have to deal with.
Never has Social Security run a deficit and never can it
until we in Congress change the law.
With that, I would yield back.
Chairman JOHNSON. Do you want to make a final comment on
that?
Mr. BLAHOUS. I certainly do not want to be construed as
implying that the bonds in the trust fund are not real assets
to Social Security. As my testimony indicates, I think the
Trustees' report makes clear those bonds are backed by the full
faith and credit of the U.S. Government, true assets to the
program.
Where you get into these controversies about the trust
fund, it is not really so much about whether they are real
assets to Social Security, but it usually has to do with these
arguments between analysts as to who is paying for the trust
fund bonds.
For example, the interest payments, we did $200 billion
plus in general revenue transfers this year to Social Security
from the general fund, without collecting any taxes based on
that $200 billion.
Those bonds are going to earn $400 billion or so of
interest up through 2033. You have this analytical question,
who is really paying for that interest, the taxpayer who
finances the general fund of the U.S. Government or the person
investing in the Treasury bonds.
It is not necessarily the case they were paid for by
workers on Social Security and there is just a fierce
analytical argument as to whether that portion of Social
Security's financing comes from contributions made by workers
or some other source.
I certainly do not want to be construed as saying that it
is not real money for Social Security.
Mr. BECERRA. Mr. Chairman, this is what I love about
hearings. When we actually can have this kind of a discussion,
this is what I think the public would love to here, rather than
just our doing our five minutes of asking questions and you
only getting five minutes to respond or give your testimony, I
think actually Chairman Camp has done a great job on this on
taxes where he has allowed us to have these informal off the
record kind of conversations with experts on tax reform, and I
think we could do more of those, maybe even on Social Security.
For example, Mr. Blahous, you pointed out something very
important. When we did the payroll tax cut to try to help
working families with this recession, you are right, we told
them you have to contribute less to your FICA taxes to Social
Security.
Congress intentionally said we are not going to damage
Social Security. We are going to take money from the general
fund and replace the money that otherwise would have gone in.
I would respond to your point, which I think is a valid
point, is that real money that should earn interest through
these Treasury bonds because it really came from the general
fund, and I would say absolutely it should earn interest.
We consciously in Congress said we do not want to undermine
Social Security, we want to help the economy and give working
families who pay FICA taxes a bit of a break, but we do not
want to do that at the expense of Social Security when these
folks retire.
I would say the decision was consciously made by Congress
that we knew that money would be used to buy Treasury bonds
that would then earn interest and therefore, we knew that would
become money that the Federal operating budget would owe to
Social Security when the time came to collect on those Treasury
bonds.
Your point is absolutely well taken. That is the kind of
parsing that I think we have to discuss. Otherwise, everyone
gets confused about is it real money, is it not real money. I
appreciate the point you made.
Chairman JOHNSON. I want to thank both of you for being
here today. I think we have had a positive discussion. We do
need to fix Social Security and we intend to do it.
I want to thank all the members for being here today as
well. Mr. Stark, thank you for coming.
With that, the meeting stands adjourned.
[Whereupon, at 10:28 a.m., the subcommittee was adjourned.]
[Submissions for the Record follow:]
The Honorable Pete Stark
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NCPA
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MATERIAL SUBMITTED FOR THE RECORD
Questions for the Record:
Charles P. Blahous III, Ph.D.
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